This article focuses on tactics and techniques General Counsel and Chief Legal Officers are employing to reduce their outside legal spend -- and whether they work. Alternative fee arrangements, discounted hourly billing and other approaches to controlling legal spend are addressed. The article also explores solutions that companies like Pfizer, Cisco and Rio Tinto have deployed.
GPS for General Counsel: Navigating Fee Transition
1. gPs for general Counsel:
navigating Fee transition
Pamela H. Woldow
By Pamela H. Woldow
a
s we enter the seventh quarter of the This article focuses on tactics and tech-
Great Recession, pundits have varying niques general counsel and chief legal officers
ideas about the direction in which the are employing to reduce their outside legal
legal profession is moving. Some predict a spend. It also examines whether those tactics
continuing skid: more layoffs, less and less are working.
work for law firms, more law firm failures, You can’t talk about reducing outside legal
attrition everywhere. Others talk optimisti- spend without talking about alternative fee
cally about “things getting back to normal,” a arrangements (AFAs). Although AFAs have
recovery that supposedly will lead back to the been touted as a significant means of achieving
“... corporate status quo, to calm waters and pre-recession savings for years, the recession has made them
revenue models. Still others foresee a “new a hot topic of late, even though the term is used
legal normal,” that is, a restructuring of legal eco- quite differently by different people. While
nomics and the changing face of the relation- AFAs have no universally-accepted definition,
departments ships between inside and outside counsel. a useful baseline starts with what they are not.
Frankly, the truth seems to be that no one AFAs are methods of pricing the delivery of legal
have can claim a firm fix on exactly where we're services that are not based on the billable hour or
going. There are no reliable GPS devices to solely on any other measure of time spent. (Thus,
experienced map the new topography of the legal land- discounted hourly rates, blended hourly rates
scape, no reassuring synthetic voices saying, and volume discounts predicated on hourly
a staggering “turn left here,” no step-by-step directions for billings are not AFAs).
where to turn and how fast to go. That said, Instead, AFAs are approaches to pricing
75% increase all corporate counsel report one near-universal services that better reflect the value that the cli-
map coordinate: the injunction from their se- ent places on particular legal matters and the value
in legal nior management that they “do more with conferred by outside counsel. Examples of “real”
less”— sometimes a lot less. For 2009, on aver- AFAs include fixed or flat fees for multiple
services
age, corporate legal departments were on the matters or classes of matters; fixed or flat fees
receiving end of budget cuts of 11.5% with a for single matters; fixed or flat fees for phases
costs over
range of 0 to 75%, according to the Altman Weil of matters; retainers; and/or contingent fees.
the last Flash Survey on Law Department Cost Control. The cardinal virtue of AFAs (from the in-
There are, of course, two parallel courses house counsel’s viewpoint) is that they per-
ten years ...” for law departments with regard to legal cost mit greater predictability for forecasting,
belt-tightening: trim administrative over- budgeting and controlling legal spend. Their
head and salaries or reduce the outside cardinal shortcoming is that they represent
legal spend. In 2008 and 2009, cost-cutting new and uncharted territory for many gen-
has been the number one priority, and most eral counsel long-accustomed to time-based
law departments have sought ways to con- fee arrangements.
trol costs and rein-in budgets in both areas.
That effort makes enormous sense since a Going in the Wrong Direction
recent BTI survey reported that, on average, Many general counsel suffer from the illusion
corporate legal departments have experi- that negotiating a discount in hourly rates
enced a staggering 75% increase in legal will prove a panacea for all their cost prob-
services costs over the last ten years, far lems. No need to go through all the rigmarole
outpacing inflation. of determining how to define and assess value,
6 J a n u a r y 2 0 10 R e p o r t t o L e ga l M a n a g e m e n t
2. they think; just get the law firms to under alternative arrangements. Premium Practices Forecast, predicts
knock down their rates and the total Pfizer is using a single firm to handle an increase this year of more than 50
dollar outlay is bound to diminish. its U.S. labor and employment work percent in corporate spending on al-
Not necessarily. Many general for 2008 and 2009 on an alternative fee ternatives to the traditional hourly
counsel have said that when an out- basis. Tyco has switched almost all of fee model. The BTI survey of 370
side law firm’s hourly rate is dis- its outside legal work to an alternative lawyers who work for Fortune 1000
counted, often the amount of time fee structure. The list of other com- companies found that their AFA-
or the number of attorneys it takes panies that have begun using AFAs is spend has totaled $13.1 billion so far
to complete a task increases corre- now quite long; a sampling includes this year, versus $8.6 billion for the
spondingly, thereby nullifying the Levi Strauss, American Express, Burger same period in 2008, and has produced
discount. King, UPS, Boehringer Ingelheim, average cost savings for those corpo-
Our current economic woes have Cisco, Prudential Financial, and rate law departments of 15%.
popularized another variation on General Electric. These are clear signs that the tran-
this theme, one Susan Hackett, Senior The above notwithstanding, ei- sition is gaining momentum and ap-
Vice President and General Counsel ther we're still at the nascent stage of pears to be a trend. As one wag put
of the American Corporate Counsel a fundamental paradigm shift in le- it when asked the difference between
Association, has named “the merry- gal billing, or else a lot of lawyers a fad and a trend, “Trends matter, and
go-round-of-firms-raising-rates-so- — in-house and in firms — are con- trends shape the future. Fads fade.”
clients-will-demand-discounts.” vinced that AFAs represent a passing
Whether or not the client realizes fad. In a flash survey conducted by Resisting a Change in Direction
they are helping to perpetuate this Altman Weil at the end of 2008, 82.6% The groundswell of belief that AFAs
cycle, this exchange does not sup- of surveyed general counsel reported represent the future direction of legal
port strong, institutionalized, trust- that less than 10% of their outside pricing — or at least one of several
ed relationships over the long-term. legal fees were AFAs. directions — is not embraced by all.
It is not the way to create a predict- Still, AFAs seem to be gaining Many inside and outside counsel are
able spend (because hours tend to traction, suggesting that a fundamen- not willing and able to enter into or
“float” inversely to the present ne- tal change may be underway. By entertain AFAs. They raise a litany of
gotiated rate), and it doesn’t create April 2009, a survey conducted by objections, which we summarize in
a drop in total legal spend either. the Association of Corporate Counsel the table on page 8.
Discounted rates have all the same found that a stunning 77% of mem- This list of anti-AFA rationales is
downsides of billable hours, with bers would like to consider alternative mentioned at every conference on
the added detriment that they add fee arrangements in work handled by legal pricing, whether attended by
hours inflation. As Patrick Lamb of outside counsel. A survey of corpo- corporate counsel or law firms.
the Valorem Law Group puts it, “the rate legal spending for 2009, the BTI Feelings run high, the first-adopter
most critical failing is that it puts the continued on page 8
lawyer’s economic interest at odds
with his or her client’s. The lawyer Percentage of your outside legal fees spent on alternative
has an economic incentive to bill fee arrangements?
more, not less.”
76% to 100% 0.0%
Charting a New Direction?
Recognizing that discounted rates
often do not in fact generate re- 51% to 75% 2.6%
duced legal spend, many sophisti-
cated legal departments are buying
heavily into AFAs. For example, 26% to 50% 5.2%
almost half of United Technologies’
legal matters now are handled un- 11% to 25% 9.6%
der a variety of alternative fee ar-
rangements, from fixed fees to a
combination of fixed fees and bo- 10% or less 82.6%
nuses. This year, 45% of Microsoft's
outside counsel fees will be paid 0% 20% 40% 60% 80% 100%
R e p o r t t o L e ga l M a n a g e m e n t J a n u a r y 2 010 7
3. GPS … continued from page 7 of Sun Microsystems, provocatively way that impact the initial valuation,
change agents sparring with the suggests those defenders of the sta- and then adjustments can be made. As
don’t-fix-it-if-it-ain’t-broke defenders tus quo will “go the way of the companies use this process, they be-
of the established time-based order. Mastodon.” come progressively more adept at as-
True, calculating and assigning a signing value that reflects their
Setting a New Course precise value to a matter, and as- business goals and risk tolerances.
In any system, large-scale structural sessing the risks and benefits of a The general counsel’s next step is
change creates a steep new learning transaction or case to the company, to talk with the proper law firm. Many
curve, and learning to negotiate and is new territory for many corporate say that in house departments should
manage AFAs is no exception. counsel, and may compel new ways not spend time trying to educate law
Mastering the tactics and techniques of thinking. firms that do not “get it” — i.e., that
of AFAs does require a new mind-set, First, they will need to engage in do not understand why AFAs repre-
as well as considerable effort by cor- discussions both inside and outside sent good business practices for them.
porate counsel in defining measures the company, but they cannot have General counsel should not waste
of value, deconstructing engage- such discussions without first think- their time on law firms that actively
ments into specific tasks, translating ing about how the work is structured, resist new ways of pricing services. In
their historical experience into new what exactly the work is that they are fact, they should grant preference to
value models and working through paying for (document processing, creative firms that initiate discussions
zero-based negotiations where the knowledge management, legal ad- of AFAs.
parties start on equal footing. “This vice, research, photocopying, etc.), There are approximately 125,000
is more a matter of evolution — as whether they need to pay someone law firms in the US. Among them are
new methods become more wide- with a law degree to do that work, plenty of firms that do “get it” and are
spread, more general counsel will and if not, whether a law firm should attuned to client needs for predictable
adopt them,” says Paul Lippe, CEO be doing it at all. Their initial focus fees from excellent and efficient law-
of Legal OnRamp. needs to be what they’re paying for, yers, wherever they may be located.
As more and more major players why they are paying for it and These firms embrace new approaches
decide to innovate and commit to whether it is the best way to use the to expanding their market share and
better aligning their interests, to company’s dollar. competing for at least part of major
achieving predictability of spend, to Once corporate counsel have ana- clients’ legal spend. Word-of-mouth
equalizing risk sharing and to using lyzed the legal component, a meeting already is flagging some of these
fees to encourage risk avoidance (and between corporate counsel, the busi- thought-leaders, and tales of major
not just loss minimization), the skepti- ness people and the risk manager representations moving from large
cal attitude toward AFAs begins to will yield a value that can be as- firms to smaller innovators are be-
sound like the resistance of the change- signed to a given matter or group of coming increasingly common.
averse. Mike Dillon, General Counsel matters. Facts may emerge along the We remind those who complain
about how time-consuming it is to
develop a new framework for negoti-
Corporate Counsel Law Firms ating and managing AFAs that one of
the biggest time wasters in corporate
Hard or impossible to assign value AFAs are just a way to decrease
legal departments is the need to spend
to matters in advance our fees
hours and hours poring over legal
Takes more time to enter into than AFAs are hard to figure out bills after the fact to try to trim a few
billable hour arrangements and because our operating numbers are hours here and there. That effort ex-
my time is already stretched based on billable hours emplifies the “closing the barn door
Makes it hard to compare data We don’t know what it costs to after the horse has left” mentality, and
from previous years that were deliver services because it depends post hoc billing disputes are the most
based on billable hours on the individual matter frequently cited reasons for souring
relationships between in-house and
Don’t know if you are setting Getting efficient means we will
outside lawyers. With AFAs, the cost
the right price earn less. Our system is based on
is the cost. It doesn’t matter if a firm
working more hours, not fewer
takes two or 20 hours to complete a
The devil you know is better The system works for us. task because the price is defined from
than the devil you don’t Why change? the outset and the firm is responsible
8 J a n u a r y 2 010 Report to Legal Management
4. for managing to the price and deliv- explore, probe and elicit information lawyers — many of whom are per-
ering the negotiated outcome as cost- that bears directly on pricing the rep- fectly content with the past approach-
effectively as possible. resentation. es and relationships. General counsel
Some general counsel worry about Although law firms may not im- must make it clear to their lawyers
whether it can be shown that AFAs mediately see the benefits of AFAs to that they expect them to embrace cost
were in fact set at the “right” level. them, new approaches to structuring cutting methods and that the com-
What they fail to grasp is that there and staffing legal service can help pany will tie compensation and bo-
is no right or wrong price. There them to plan for predictable income nuses to those expectations. “If you
never has been, and there never will streams and encourage them to de- manage a team of lawyers,” says Jeff
be. Existing billable hour rates don’t velop practice management methods Carr, General Counsel of FMC
necessarily represent the “right” that reward them for efficiency and Technologies, “this means making
price; they are variable and only re- achieving desired results. For law [the use of AFAs] important to those
flect what a firm hopes the market firms as well as clients, effective fee who work for you — and that means
will bear or how much pricing lever- arrangements establish the value of making it part of their objectives,
age it believes it enjoys. Quite simply, the matter, define the manner in their performance goals, their com-
“there is only the price someone is which the fee will be paid, and create pensation and ultimately their con-
willing to buy at and the price some- incentives for outside counsel to un- tinued employment at your company.
one is willing to sell at. This is how derstand and achieve the company’s Unless and until you do so, your
business in the real world operates,” goals. lawyers will take the conservative,
says John Chisholm of JC Consulting. Having worked with hundreds of less risky path of the status quo.”
“This is how the CEO and the CFO inside and outside counsel in large,
of a company operate. Indeed it is medium and small companies and Driving on the Same Highway
how the company operates.” The law firms, we at Altman Weil have AFAs work best when all parties’
irony of corporate counsel resisting seen the importance of introducing interests are aligned and where the
AFAs is that never before have they AFAs at some clear and logical start- continuing quality of the law firm-
had so much leverage in insisting on ing point, rather than attempting to client relationship is given priority
pricing that meets their needs, rather use them for all types of matters and over raw bargaining power. When all
than the law firms’ profit objectives. representation. is said and done, the key to successful
If they start with determining the Often the best place to begin is AFAs is “to get the lawyers and the
value of a matter to the company, with various kinds of repetitive mat- clients on the same page early about
they are likely to end up with a fee ters because they can most easily be the goal, agree upon how close one
that is right for the company. transitioned to AFAs. For some cli- can get to the goal, what an accept-
ents, commodity work focuses on able level of achievement is, and then
Charting a Course employment matters. In others it structure the plan from there, know-
Once the value proposition has been means products liability, routine in- ing what costs make sense,” says.
established, corporate counsel must tellectual property, due diligence, Carl Herstein, a partner at Honigman
next select the right AFA approach, and non-critical litigation. For such Miller Schwarz and Cohn LLP. “You
i.e., the best fee structures for the repetitive matters, it is important to can always modify as you go along
particular tasks at hand. To accom- ask if there are particular goals that if it becomes clear that the worth of
plish this, corporate counsel must will define a successful outcome. For the matter has changed.”
succinctly communicate the value of example, some companies value fast Over the last several years, law
the matter to outside counsel. That cycle time (time to resolution/filing/ departments and law firms that have
is, they must be utterly clear about completion), while others may have developed a “getting to yes” ap-
how the company views the risk and particular dollar targets they are proach to fee negotiation, rather than
reward of a particular matter when shooting for. If there are such drivers, holding to an adversarial approach,
compared to the fee. They should the parties should build in incentive have been coming up big winners
make it clear that the law firm’s payments that reward the firm for — in terms of solid, trusting client
proposed fee must bear a direct rela- reaching the stated goals. relationships and in terms of drawing
tionship to how the company views more work into the firm. This notion
the worth of the matter. In those Driving It Home of aligned interests must go beyond
cases where corporate counsel are not Finally, the successful implementa- lip service to better modes of collabo-
yet adept at this form of communica- tion of AFAs requires corporate coun- ration. For both corporate counsel
tion, it behooves outside counsel to sel to build buy-in from their own and law firms, the world’s present
continued on page 12
R e p o r t t o L e ga l M a n a g e m e n t J a n u a r y 2 010 9
